Seeking lower-volatility U.S. consumer stocks

The Globe and Mail, Number Cruncher

By Peter Ashton

April 3, 2017

What are we looking for?

U.S. consumer sector stocks with strong fundamentals and below-average volatility.

With U.S. markets now running within a few percentage points off their record highs, many investors have become concerned with the durability of the bull market now entering its ninth year. Sectors such as consumer goods are typically subject to less volatility than other sectors and have the benefit of being defensive in the event of a market downturn. In addition, these stocks often offer above average dividends.

The screen

We will be using Strategy Builder to search for U.S. consumer stocks with low volatility, strong dividends and reasonable valuations.We begin by setting a minimum market capitalization threshold of $10-billion (U.S.) to focus on larger, more established companies in the sector. To ensure we don’t overpay for our investments we will select stocks with forward price-to-earnings ratios of 27 or less. Next, we will look for companies that have a dividend of at least 2 per cent and a year-over-year dividend growth rate of 4 per cent or more.

Finally, in order to focus on stocks that demonstrate low volatility, we will screen for stocks with a beta of between 0 and 0.75. Beta is a measure of stock price volatility. A beta in this range means that the stock has 75 per cent or less of the volatility of the overall market.

What did we find?

Topping our list is Coca-Cola a Warren Buffett favourite with a strong dividend and stable earnings (the company has a long-term earnings-per-share growth rate of 5 per cent). Coke has a current dividend yield of 3.4 percent and has a one year dividend growth rate of 6.1 per cent.

Tobacco giant Altria Group has the lowest beta on our list at 0.19 and has a dividend yield of 3.3 per cent. Altria stock has been a tear for the past year – up 17 per cent in the past 12 months and more than 8 percent year-to date.

The lowest forward P/E ratio on our list belongs to J.M. Smucker Co. at just 17.3. The stock’s low P/E is in part due to its poor market performance over the past year. In August, 2016, the company issued lowered revenue guidance that caused investors to sell the stock down by more than 20 per cent over the following five months.

Historical performance

Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 14.1 per cent annualized return compared with 9.3 per cent for the Dow Jones industrial average and 10.7 per cent for the S&P 500.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.